A New Bubble For China?

The United States isn't the only government in the world that's spending money to stimulate its economy. Since the start of the recession, China has been spending some of its vast foreign reserves on a long series of capital and infrastructure projects, and the evidence suggests the effort is succeeding.

NPR's Jim Zarroli spoke with Gary Hufbauer, senior fellow at the Peterson Institute for International Economics, about what China's been doing, and whether all that building and spending may turn out to be too much of a good thing.

The Chinese government says both exports and imports have fallen quite a bit during the recession. At the same time, it says its economy grew 8.9 percent in the last quarter. Where is the growth coming from?

What China did was really ramp up investment spending, infrastructure spending with a heavy emphasis on the western provinces. They can build roads. They can lay cement. They can build coal-powered plants. They don't have the kind of regulatory delays and bureaucratic delays that often beset us and other countries. And then they topped it off a bit with some increase in government spending on behalf of households, which the U.S. has long been pushing for. And by that I mean health care and some other kinds of social spending, some education and so forth. Now, those things are still a very small part of the Chinese budget, but they did increase very rapidly in this period.

So how does China's stimulus spending compare to what the U.S. and other major countries have done?

In terms of size, it's probably bigger. Of course, the numbers coming out of China are a little hard to fathom and penetrate, but they were saying something like $500 billion, and that's against an economy which is about $4 trillion. So that's a little more than 10 percent. Our stimulus spending — and I am leaving aside what the Federal Reserve did with Fannie Mae and all that, which is pretty large in itself — our on-budget stimulus spending, the big bill that President Obama put through, was about $800 billion in round terms. And that's against an economy, a gross domestic product, of about $14 trillion. So you can see the percentage is less, maybe closer to 5 percent. But I think the other thing which largely explains why China has done so well in terms of economic growth in this most recent period is that they dispersed it, they started spending from the get-go. And we're probably not more than halfway through the authorized spending from the president's package earlier this year, and that's a big difference.

Of course, one of the big differences between China and the U.S. is China is a creditor nation with large foreign reserves, and we run a big deficit. Does that mean they just have more leeway to do stimulus spending?

Absolutely. And their creditor position is a consequence of the Asian debt crisis of the late '90s. What China decided and other Asian countries decided is, 'Hey, we can't rely on the International Monetary Fund when bad times come. We're going to do it ourselves.' And they have done it themselves. [China's foreign exchange reserves] are now above $2 trillion, and a decade ago it was in the $300-400 billion range. And when you've got that kind of money in the bank, you don't have the constraints that other countries might feel.

So what do you think about people who say China is pouring a lot of money into factories and capital projects it doesn't really need, and it's actually creating a new bubble?

There are two dimensions to that, and one is not so plausible, and the other is quite plausible.

The one which I don't think is so plausible involves the property markets. China is a big country, as everyone knows. But when we think of property, we think of Shanghai and Beijing. And it is true that in those two mega-cities, property values have shot up quite a bit in recent months, like 20 to 30 percent since the low time in March and April. So you might say there's a big property bubble. But you can't generalize from Shanghai and Beijing. And a fair index of the whole country in terms of real estate values is probably an increase of 5 percent. So that doesn't sound so bubbly.

Now, the second part which I think is more problematic is this investment in heavy industry, infrastructure, manufacturing and so forth. It's probably unrealistic to think they're going to mop up all the manufacturing industry of Asia and go beyond there. They probably will end up with some excess capacity in some industries, and one that's quite noticeable. Their steel capacity exceeds [that of a combination of] the U.S., Japan, Germany, and you could probably toss in a couple of other countries as well. And that's probably more steel than China can possibly consume, and if they try to sell it on the world market, it will be quite a shock. There are a few other areas like that. Their auto industry is ramping up quite fast. So that part of the story, which is excess manufacturing capacity, is quite troubling.

Troubling in what sense?

Troubling in that they may not be able to sell all the stuff they will be able to produce either internationally or domestically, and then there will be companies which have borrowed from the banks and find it difficult to pay off their loans. They don't have a subprime problem in the housing market, but they could have a subprime problem in the industrial market.

If their banks get in trouble, what's the risk for us in the West?

It's a big risk. If the non-performing loans shoot up because of these bubble-type characteristics, that will put quite a squeeze on the banking system, and I don't know whether the central government will do again what they did a couple of years ago, which was basically take a lot of the bad loans, which had been loaned out to state-run enterprises, the really heavy industries — fertilizer, steel, construction materials, cement and so forth — they just took those loans off the book and put them in some sort of bad bank. Whether they do that again, that is a big question. If the banking system in China runs into problems, probably the response will be to kind of slow things down a lot. And China is very much the engine of Asia, and increasingly the engine of the world, so that will certainly affect us, as well.